Is Bigger Better?

Farmers continually tell me they have to farm more acres to be more efficient and profitable. The financial data we've gathered the past two years would indicate otherwise.

It's not the size of a business, but rather the internal efficiency and cost structures that have the largest impact on financial success.

For example, in the past year we have had several operations between 1,000 and 1,500 acres generate net worth increases in excess of $75,000/year (after paying all personal living expenses and income taxes). These operations average $60-plus/acre profit per year, and this is after increased energy expenses in 2005.

Larger operations are also able to produce this type of income per acre. But many times in a larger cash grain operation that has doubled or tripled acres farmed in the last five years, they don't earn the same amount of net income per acre as smaller operations.

Why does this happen? In order for cash grain operators to significantly increase the acres farmed, they have to bid higher cash rental rates, purchase more farm equipment — which increases machinery costs on all of their acres — and borrow larger sums of money from their lenders and suppliers to finance the production on the added acres.

Essentially, by increasing in size these businesses have doubled or tripled their financial and production risks, increasing their fixed costs on all acres. In addition, many times their management teams have not implemented additional risk management practices to offset the additional risks due to scale.

Conversely, the operators who can effectively manage the new levels of complexity in their business have experienced excellent profits.

The bottom line is whether you are a large or moderate sized operation. Your ability to manage your business effectively determines your financial success, not the number of acres farmed.

As we begin another production year, we need to focus on the pieces of our business that will provide the greatest level of return. We've identified these areas as machinery and labor cost management, marketing and agronomic management. Our new benchmarking data suggests there is a potential $100/acre on the table from the best operations to the worst.

Proactive management of these three areas will do the most to determine the profitability of your business, whether you are a small, medium or large-scale producer. It's very important to have a risk management team in place to help you develop a financial plan and income goals and then execute that plan to maximize results. You can't manage what you can't see and/or visualize, so having a road map to follow is the best starting place.

Turning Things Around

Have you ever found yourself on the wrong side of the bell curve and slipping? What does it take to turn around an operation?

We've been involved in some great success stories, and one consistent theme in any turnaround is the belief that you control your own destiny. That involves some bold moves and out-of-the-box thinking, along with executing the basic block and tackling involved in running a farm business.

Those basics are what I wrote about in the main article of this column. How successful have they been? I can think of one that went from losses four years in a row to four very profitable years.

Success stories are not only at the farm level. The Feb. 27 issue of Forbes magazine has a great story about Caterpillar and its turnaround. In 1983 and 1984 Cat was losing $1 million per day. The company was faced with the same challenges the auto industry is today — high benefit costs, old factories and stiff global competition. Today it's the envy of most of corporate America. Cat did it by getting lean, obliterating its centralized hierarchy, upgrading technology and improving efficiency. For example, to build a dozer it used to take three days going down the assembly line; now it's finished in one day.

The result: In the last five years Cat stock has tripled in value while the S&P has declined 6.3%.

If you're convinced you control your own destiny it increases the possibility of a turnaround, large or small.